Small businesses and the Affordable Care Act

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1 Affordable Care Act Small Business Guide NATIONWIDE RETIREMENT INSTITUTE SM Small businesses and the Affordable Care Act Health insurance reform and insights into employer-sponsored benefits 84% of small business owners are expecting to make changes to their employee benefits before Nationwide Small Business Owners Survey. Conducted October 2014 with 500 business owners. Results based on those with 50 to 99 employees.

2 Table of contents 2 Key provisions 4 The employer mandate 6 Managing costs 8 The future 11 How Nationwide can help 2

3 Most small businesses are considering some type of change because of the Affordable Care Act % increase employee benefits 30 % fewer or more part-time employees 33 % reduce employee benefits 46 % change providers, plans or options 37 % ask their employees to pay more Nationwide is committed to helping America prepare for and live in retirement with guidance from financial advisors. The Nationwide Retirement Institute SM provides practical thought leadership and comprehensive solutions to financial advisors and their clients. Through education and insights, client-ready tools and consultative support, we break down and simplify complex retirement challenges to help advisors and clients plan for a more secure financial future. This summary guide is based on the white paper Health Benefit Plans After Reform, Emerging Trends and Key Considerations by Adam Beck, J.D. from The American College. The white paper is included in the back of this guide for reference, and it can be found online at nationwidefinancial.com/acasmallbusiness. 2 More than 100% because employers selected multiple options. 1

4 The Affordable Care Act The Patient Protection and Affordable Care Act (ACA), also known as Obamacare, was signed into law in Its provisions have gradually been going into effect since then. The employer mandate a requirement that all employers with more than 50 full-time employees offer affordable health insurance is likely to usher in significant changes. Failure to comply with this requirement can result in a tax penalty. Experts predict that within 10 years, many Americans will obtain their health insurance not from their employer but through a public or private health insurance exchange. 3 In the face of such changes, employers will need to consider the role that other benefits such as a retirement plan play as a means of attracting and retaining employees. After salary, employees of all ages value a generous retirement plan over paid time off generous health care a bonus guaranteed retirement 4 3 Ezekiel J. Emanuel. Architect of Health Law Predicts a Shift Away From Employer Coverage. March 21, Towers Watson 2013/2014 Global Benefit Attitudes Survey U.S. April

5 Overview of health care reform The ACA represents one of the most sweeping pieces of legislation of our generation. While lengthy and broad in scope, the goals of the legislation can be summed up easily. At its core, the ACA has three main goals: Reduce the number of Americans without health insurance Slow the rate of increases in the cost of health care Enhance consumer health care protections for insured Americans Key health care coverage provisions The ACA features notable changes, such as: Improving access to health care Creates the public Health Insurance Marketplace (health insurance exchanges) to help consumers comparison shop providers Requires all premiums be set using community rating rather than medical underwriting. Plans and carriers may determine rates using only one s age, geographic location, household size and use of tobacco Allows young adults to remain on their parents insurance until age 26 Increasing consumer protections Prohibits health insurers from denying coverage to people for any reason, including health status and pre-existing conditions Prevents health insurers from charging higher premiums based on gender and health status (other than smoking) Prohibits health insurers from imposing lifetime limits on coverage or rescinding coverage (except in cases of fraud) Improving quality and lowering costs Health insurers must pay 100% of preventative services The law limits annual out-ofpocket cost-sharing to no more than $6,600 per individual and $13,200 for a family (2015), indexed for inflation Plans may not set a dollar limit on claims that will be paid out in the course of a year and a participant s lifetime as long as the claims apply to essential health benefits 3

6 The employer mandate The ACA establishes a requirement that all employers with more than 50 employees offer affordable health insurance coverage to full-time employees. Failure to comply with this requirement can result in a tax penalty. The mandate for coverage is scheduled to begin January 1, 2015 for employers with 100 or more full-time equivalent employees (FTEEs) and January 1, 2016 for those with 50 to 99 FTEEs. The requirement applies to all businesses and organizations that employ at least 50 FTEEs in a given month. Employers with fewer than 50 FTEEs are not required to offer health insurance. Calculating your FTEEs Full Time Equivalent Employees per month = full-time employees (30 hours a week) + all part-time employees hours 120 Types of penalties There are two types of penalties that can be imposed on employers who fail to offer adequate, affordable coverage. Penalty for non-offering employers Applies to qualifying large employers who do not offer minimum essential coverage to substantially all its fulltime employees and have received certification from an exchange that an employee has purchased a plan with a subsidy. This employer is subject to a penalty assessed by the IRS. Penalty for unaffordable coverage An employer who offers minimum essential coverage must also be deemed to be affordable. There are two tests which must be passed: The Minimum Value Test: the plan must cover at least 60% of the total allowed costs of benefits The Affordability Test: the premium for the lowest-cost employee-only plan must not exceed 9.56% of the employee s household income. There is a safe harbor provision that allows employers to determine affordability by using only the employee s W-2 earnings Federal income tax laws are complex and subject to change. The information in this guide is based on current interpretations of the law and is not guaranteed. Nationwide and its representatives do not give legal or tax advice. You should consult your attorney or tax adviser for answers to your specific tax questions. 4

7 Understanding the penalty 5 If you have or more full-time equivalent employees 7 No penalty YES Do you offer coverage? YES Does the plan provide minimum value? (60%+ of the covered health care costs for a typical population) YES Is the coverage affordable? (Less than 9.56% of family or W-2 income) NO NO NO Penalty: $2,084 per FTE (minus first 30*) applies if one full-time employee received federal premium subsidy for marketplace coverage. * Minus 80 in 2015 Penalty: Lesser of: $3,126 per FTE receiving subsidy up to $2,084 per FTE (minus first 30*) The following scenario shows how penalties are calculated. The penalties are assessed based on months, but to keep it simple we ll use annual figures. It s 2016 and an employer has 80 full-time employees and no part-time employees. 1 2 Employer does not provide coverage at all and at least one employee received a tax-credit on the state of federal marketplace: = x $2,084 = $104,200 This scenario is for illustrative purposes only. Employer does provide coverage, but 10 employees got it cheaper and qualified for a subsidy in the Health Insurance Marketplace: 10 x $3,126 = $31,260 Maximum is equal to $2,084 x (80 30) = 104,200 If 34 or more employees get a subsidy on the exchange, the penalty is equal to the amount assessed as if no coverage were offered at all. 5 Projected 2015 and 2016 penalties. These penalties are indexed for inflation. 6 The Henry J. Kaiser Family Foundation. Employer Responsibility Under the Affordable Care Act. December 17, FTEEs as of January 1,

8 Strategies for managing the costs of health insurance Business owners with more than 50 qualifying full-time employees will face considerations beyond simply affirming that coverage is offered or calculating a penalty. Some will continue to offer coverage, others will adjust wages and some will pay the penalty. Offering health insurance Employers will need to make sure their health insurance covers nearly all of their employees and is considered affordable. It will be critical to monitor the affordability of their plans to ensure that no full-time employee will be eligible for a tax credit to purchase coverage through an exchange. Strategies for employers who plan to offer health insurance to help manage costs Shift some employees to part-time While part-time employees count toward the coverage requirement, those working fewer than 30 hours a week do not have to be insured. Increase the amount that employees are required to contribute to their health insurance 67% of employers surveyed agreed that their employees would have to take on greater financial responsibilities for their health care. 8 Offer a high-deductible plan with a health savings account Increase deductible or co-payments Convert to a self-funded plan, which may involve greater risk, but is subject to fewer ACA requirements A self-funded plan is not traditional insurance. Instead, the business pays for medical claims from a general fund that includes employee contributions. Self-funded plans are exempt from these requirements: Covering a comprehensive package of essential health benefits Guaranteed issue of coverage Guaranteed renewability of coverage Medical loss ratio 6

9 The cost for employer health insurance coverage increased by 25% from 2009 to 2014 with the average family coverage costing $16,834 in Today, more than 60% of employer-sponsored plans are self-funded. 10 Not offering health insurance Employers may opt to offer other benefits instead of health insurance, such as: Move to a defined contribution model for health care and related benefits Employers could plan for an annual spending increase of a set percentage each year. This could help control costs and help employers plan; however, under this approach, employers could face unpredicted premium increases (k) retirement plan Dental insurance Pay the penalty Disability insurance Term life insurance Some employers may determine it s economically better to pay the penalty than to offer health coverage that meets the ACA requirements. Stop loss insurance can reimburse for employees covered medical bills after the plan has reached a predetermined deductible Employers may increase compensation to employees and encourage them to use their own funds to purchase coverage through the Health Insurance Marketplace if the company determines that the penalty plus the increased payroll spending is less costly than providing insurance. 8 Nationwide Small Business Owners Survey. Conducted October 2014 with 500 business owners. Results based on those with 1 to 299 employees. 9 Learn more about this and other strategies by reading our white paper by Beck J.D., Adam. Health Benefit Plans After Reform, Emerging Trends and Key Considerations. October Henry J. Kaiser Family Foundation and Health Research & Educational Trust. Employer Health Benefits Annual Survey

10 The future of health insurance and employee benefits The ACA has created a marketplace where Americans can obtain coverage from a variety of providers. With the range of options exceeding what most employers offer, the exchanges may become a desirable alternative. Employers may shift the benefit picture If the number of employers offering health insurance declines, as some experts predict, the implication for other benefit offerings could be significant. 11 Employers will have to compensate their employees in other ways to retain them, such as salary and wage benefits and/or increasing contributions or matching funds in retirement plans. The ACA presents both opportunities and challenges to small businesses. Smaller employers who aren t required to offer health insurance may feel less pressure to offer insurance if they know their employees can find affordable coverage in the public Health Care Marketplace. The challenge lies in creating new ways to retain employees through enhancing benefits packages above and beyond what s available to an individual. Employers need to further incentivize their best employees to stay with options such as retirement planning benefits. 8

11 Top desired benefits This new era of health insurance has created a shift. Individual consumers can take ownership of purchasing their health insurance, which in turn offers them greater mobility. The ACA has created opportunities for entrepreneurs and people wanting to retire early by removing the need to keep a job just to receive health insurance. Employees rate their employer-provided retirement plan as one of their top desired benefits. Younger than 40 most important Age pay pay generous retirement generous retirement a bonus generous health care paid time off a bonus generous health care important paid time off Employees ranked the top three areas in order of importance, if offered a choice by their employer Learn more about this and other strategies by reading our white paper by Beck J.D., Adam. Health Benefit Plans After Reform, Emerging Trends and Key Considerations. October Towers Watson 2013/2014 Global Benefit Attitudes Survey U.S. April

12 74% of employees identified their company s retirement program as the primary way they save for retirement. 13 In this changing environment, employee retirement benefits are only going to increase in importance. Employees are becoming more mobile as a result of the ACA and employers decisions on health insurance. Because of this, an employer-sponsored retirement plan becomes a crucial benefit for retaining and attracting employees employers also value this option as their contributions are tax deductible. 10

13 How Nationwide can help The Affordable Care Act is changing the nature of the employment relationship and workplace environment, so employers need to be ready for what lies ahead. A group retirement plan can benefit your employees and your business. A quality retirement plan can: Provide for employees Trim your tax bill Invest in your own retirement A retirement plan is an option that helps employees now and in retirement. It s also an excellent tool for attracting and keeping valuable employees, plus it helps them attain a more financially sound future. Establishing an employee retirement plan may offer tax benefits because employer contributions (and often plan expenses) are generally taxdeductible. The business may also be eligible for a tax credit for establishing a qualified retirement plan. Invest money for your own retirement in the plan that s set up for employees. A retirement plan may offer these benefits 14 : Potential growth of investment earnings that s tax deferred until a withdrawal or distribution Reduction of the income tax bill now or in the future Company matching Nationwide has offered group retirement plans for nearly 40 years, and can help you tailor a plan to meet the needs of your business. Visit nationwide.com/why-offer-your-employees-retirement-plans.jsp for more information. We recordkeep more than 40,000 plans 15 We service more than 2 million participants 15 We manage and administer over $89 billion in retirement assets Towers Watson 2013/2014 Global Benefit Attitudes Survey U.S. April Assets withdrawn from a qualified plan may be subject to a 10% penalty tax if withdrawn prior to age 59½ and all may be subject to income tax. Keep in mind that investing involves risk, so there s no guarantee investment goals will be met. 15 Nationwide Financial, July

14 Key employee benefits Another way to be prepared is to offer top employees a supplemental retirement plan. It offers employees a chance to save more once they ve maxed out their contribution to a qualified plan, which can increase engagement and retention. Insurance-based retirement plans can offer employees additional retirement income and death benefit protection Nonqualified deferred compensation plans let key employees defer more current compensation until retirement Supplemental executive retirement plan is an employee benefit designed to establish an additional retirement option Split dollar plan is a business paid life insurance benefit that provides cost recovery Nationwide can help you retain top talent with a variety of strategies. Learn more at nationwide.com/employee-retention.jsp. An array of group benefits Nationwide Employee Benefits offers the convenience and flexibility of employer and employee benefits designed to meet the unique needs of a variety of business owners and their employees. Term life insurance can provide peace of mind for employees after the loss of a loved one Dental insurance encourages employees to maintain good oral hygiene Disability insurance can protect businesses and their employees against a long or short-term disability Supplemental accident insurance bridges the gap between an emergency situation and the financial impact of a high deductible plan or insurance Medical stop loss insurance limits risk while keeping employees safe and healthy Nationwide provides competitive products with affordable coverage that allows people to protect what matters most. Visit nationwide.com/nationwide-employee-benefits.jsp to learn more about group benefits. 12

15 Employers Contact your financial advisor to learn about the products and solutions Nationwide offers to retirement plan sponsors. Financial professionals For more information about helping clients build a strong benefits plan, call the National Sales Desk at

16 Not a deposit Not FDIC or NCUSIF insured Not guaranteed by the institution Not insured by any federal government agency May lose value Be sure to choose a product that meets long-term life insurance needs, especially if personal situations change for example, marriage, birth of a child or job promotion. Weigh objectives, time horizon and risk tolerance, as well as any associated costs, before investing. Riders that customize a policy to fit individual needs usually carry an additional charge. All protections and guarantees are subject to the claims-paying ability of the issuing insurance company. This material is general in nature. It is not intended as investment or economic advice, or a recommendation to buy or sell any security or adopt any investment strategy. Additionally, it does not take into account the specific investment objectives, tax and financial condition or particular needs of any specific person. We encourage you to seek the advice of an investment professional who can tailor a financial plan to meet your specific needs. Products are not available in all states. The benefits outlined here are for illustrative purposes only and should not be considered a proposal for coverage. Limitations and exclusions apply. Products underwritten by Nationwide Mutual Insurance Company and Affiliated Companies. Not all Nationwide affiliated companies are mutual companies, and not all Nationwide members are insured by a mutual company. Subject to underwriting guidelines, review, and approval. Products and discounts not available to all persons in all states. Nationwide Investment Services Corporation, member FINRA. Nationwide, the Nationwide N and Eagle, Nationwide is on your side and Nationwide Retirement Institute are service marks of Nationwide Mutual Insurance Company Nationwide NFM-13567AO (03/15)

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